European stocks rose and the pound weakened after British inflation slowed unexpectedly, catching traders off guard as they prepare for the Federal Reserve's policy decision later.

Sterling fell as much as 0.5 per cent against the dollar to its lowest level since May as traders bet that the Bank of England is nearing the end of its hiking cycle, with only more rate increase now fully priced. U.K. bonds soared, with the yield on two-year gilts dropping 12 basis points to 4.88 per cent, the lowest since Aug. 10.

The UK's FTSE 250 index of domestic stocks jumped 1.5 per cent after the inflation boost, with homebuilders sensitive to changes in interest rates leading the gains. Europe's Stoxx 600 benchmark also benefited from the improved sentiment, climbing for the first time in three days. US equity futures edged higher. Grocery delivery company Instacart Inc. slipped in premarket, a day after surging following one of the year's biggest U.S. initial public offerings.

Britain's Consumer Prices Index rose 6.7 per cent from a year earlier in August, the slowest pace in 18 months, and less than the seven per cent expected by economists. The probability of a quarter-point rate increase by the BOE at its meeting on Thursday — almost guaranteed earlier this week — fell to 50 per cent, according to swap pricing.

“BOE policy makers must be very happy with the data, but it doesn't change anything: they will raise rates, but it will probably be a dovish hike, similar to what the European Central Bank did last week,” said Francois Rimeu, a strategist at La Francaise Asset Management in Paris.

Later in the day, the Fed is expected to pause its interest-rate hikes for the second time this year following a slowing in inflation while leaving the door open for another increase as early as November. Wall Street will be focused on whether Fed officials' forecasts for interest rates, the so-called dot plot, show the committee seems determined to hike again.

“While rates should remain steady, a question mark remains over the longer-term outlook,” said Richard Flynn, U.K. Managing Director at Charles Schwab. “Now that inflation has peaked, we are likely to see the Fed shift to a more surgical approach. There continues to be a possibility of a hike later this year as central bankers target remaining sticky areas, but one more boost is unlikely to trouble the market.”
Brent crude slipped below US$94 per barrel after a recent rally, with prices still near a 10-month high.

Goldman Sachs Group Inc. analysts raised their forecast for crude back to triple digits as worldwide demand hits unprecedented levels and OPEC+ supply curbs continue to tighten the market. The Wall Street bank pushed up its 12-month forecast for Brent to US$100 a barrel from US$93. However, most of the rally “is behind us,” the bank said in a note. 

Meanwhile, Bank of America Corp.'s Savita Subramanian became the latest Wall Street strategist to boost her target for the S&P 500 after the sharp rally in 2023 left forecasts in the dust. The strategist now expects the benchmark to end the year at 4,600 points versus her earlier target of 4,300 — implying a gain of about 3.5 per cent from its Tuesday close. 

Indicators on the macro cycle, valuations and positioning are flashing bullish signals, she said. 

Key events this week:

• Federal Reserve policy meeting followed by Fed Chair Jerome Powell's news conference, Wednesday
• Bank of Canada issues summary of its September policy meeting, Wednesday
• Eurozone consumer confidence, Thursday
• Bank of England policy meeting, Thursday
• US leading index, initial jobless claims, existing home sales, Thursday
• China's Bund Summit, Friday
• Japan CPI, PMIs, Friday
• Bank of Japan rate decision, Friday
• Eurozone S&P Global Eurozone PMIs, Friday
• U.S. S&P Global Manufacturing PMI, Friday

Some of the main moves in markets:

Stocks

• S&P 500 futures rose 0.2 per cent as of 6:09 a.m. New York time
• Nasdaq 100 futures rose 0.2 per cent
• Futures on the Dow Jones Industrial Average rose 0.2 per cent
• The Stoxx Europe 600 rose 0.6 per cent
• The MSCI World index was little changed

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro rose 0.2 per cent to US$1.0703
• The British pound fell 0.1 per cent to US$1.2376
• The Japanese yen was little changed at 147.95 per dollar

Cryptocurrencies

• Bitcoin fell 0.7 per cent to US$27,004.28
• Ether fell 1 per cent to US$1,625.75

Bonds

• The yield on 10-year Treasuries declined two basis points to 4.34 per cent
• Germany's 10-year yield declined one basis point to 2.72 per cent
• Britain's 10-year yield declined nine basis points to 4.25 per cent

Commodities

• West Texas Intermediate crude fell 1.1 per cent to US$90.22 a barrel
• Gold futures were little changed